Where'd Everybody Go?

So 2011 is around the corner. It's been almost 7 years since I started this blog and investing in real estate. Back in the first couple of years of this blog, the real estate bubble had yet to burst and people everywhere were getting into flipping properties. There were a regular group of people that used to blog on their own and leave comments on this blog. I got to thinking about what happened to those people and what they might be doing today. I went back through some of my earliest posts, found the people who used to comment a lot and tried to see if I could find them today. Truthfully, I didn't search too hard. I'm not looking to actually contact these people or anything. I was just curious to see if they were still blogging and still in real estate investing. It's possible these people are still doing that, but using different names or blogs, but it seems most have moved on.

Trish#1 - Trish ran the blog Building An Empire, which is no longer around. She lived in Oklahoma and was purchasing and rehabbing properties she bought at foreclosure auctions. I actually bought a house from her, which didn't turn out too well. (In fact, it was the only investment property I lost money on - which was entirely my fault.) Last I heard of her, sometime back in 2007, she had started working for a property management company.

Seattle Eric - Used to run the blog seattlerei.blogspot.com, which is now defunct. I'm not sure if I'm remembering correctly, but he might have left real estate investing to become a Realtor. I know one of the bloggers I followed in the Seattle area went that route.

BGInvestor - a fellow RE investor in Arizona. He ran the blog The Life And Times Of An Arizona Investor, which is still up, but hasn't been updated since 2006. His last entry said he was starting a new blog with a focus on real estate investing education, but that blog doesn't exist anymore.

Erin Morgan - aka PRLinkBiz. I met her in person back in 2006 at a local get together of people who were active on Robert Kiyosaki's RichDad.com forums. She obtained some infamy from her involvement with Casey Serin, a clueless wanna-be real estate investor. She was also part of the No Limit Ladies website, whose last entry is from March, 2009. This site was run by a couple of different women though, and I think Erin stopped posting there years earlier.

Savvy Saver - although not a real estate investor, she did follow my blog and commented frequently. She runs an eponymous blog that is still operating and focuses on personal finance.

Kenric - another Arizona resident I met at the previously mentioned Rich Dad get together. He has shifted his focus from real estate investing to creating and running internet businesses. He still actively posts on his blog Live Learn Invest.

Les - my partner in real estate investing, whom I also met at the Rich Dad meeting, although we had corresponded prior to that. He lives in Northern California. He never had a blog and I found him mainly though his postings on the discussion forums at richdad.com. I haven't been there in ages, so I don't know if he's still active there or not. He is still very much active in real estate investing, mainly as a hard money lender, although he and his wife do buy and rehab foreclosures now and then. He was a mortgage broker prior to becoming a full time real estate investor, so he was involved in real estate before the bubble started.

Steve - yet another local real estate investor. He invests in apartment complexes and it's through him that I found the apartment complex in Houston that we are both invested in. He never blogged, but did post somewhat frequently on the Rich Dad forums. Again, I don't know if he still does. He is still active in real estate investing.

So in looking back, it seems many people who got involved in real estate back in the bubble have now left. Not surprising. If people were looking for a quick or easy buck, they're not going to stick around when things head south. But I think the people that took Kiyosaki's point to heart - that your money needs to work for you and not the other way around - are still going strong. It's true, my focus has shifted more from rehabbing properties to doing more hard money lending, but I still believe in the security of real estate and its power to generate passive income. Kenric took what he learned at the get together (where someone made a presentation on internet businesses) to set up businesses that run 24 hours a day with or without him (although he has shifted lately from using drop shippers to fulfilling and shipping orders himself, so he is moving away from the truly passive concept). He took to heart another of Kiyosaki's principles - build businesses that can be sold.

I wonder if any of those people that have disappeared still take to heart the concept of passive income or if they gave it up when they gave up real estate and went back to living paycheck to paycheck? I personally no longer follow Kiyosaki or read his books - I feel he's simply repeating the same thing over and over now. I do credit him for opening my eyes to the power of passive income and for changing how I look at spending my money.

Loan Closing And Apartment Financials Improving

The property behind hard money #14 has been sold and is supposed to close escrow this week. If it does, this will have been a 6 month loan, which is pretty good. (The mortgage note was for a one year term.) The property was rehabbed in two months and was on the market for four months.

Things are turning around slowly at the Houston apartment complex too. Occupancy for November was 90% and we saw a decline of about $3,000 in rent concessions as well. Revenue is up about $3,000 from the late summer months and $20,000 higher than March, which was the lowest month this year. Expenses dropped due to some management-negotiated utility rebates from overbilling. Management also waived some management fees - not sure why. Cash flow was about negative $1,600, the lowest it's been since February. Things definitely seem to be turning around. Rent concessions, while dropping, are still higher than I'd like to see. They are roughly four times higher than they were in January of this year and three times over the budgeted amount. If we can cut that expense down, the property will easily be back in the black. But that all depends on if the local economy can support that.

In looking at the income statement in more detail, I just noticed not only did management waive their fee in November, but they did in October as well. That's a $4,800 a month savings for the last two months. Obviously, that won't continue. And I believe our mortgage switches from interest-only to interest and principle soon after the first of the year. So we're not out of the woods yet, but we are on the right track.

Man Stands On Principles, Dares Bank To Foreclose, And Wins

I wrote last month about a guy who was willing to let his bank foreclosure on his house over $25 in fees the bank erroneously charged him and refused to reverse. Turns out the bank blinked and has agreed to the man's (entirely reasonable) demands and has canceled the foreclosure four days before the auction. Nice to see someone at the bank has some common sense.

House Now On The Market

Last time, I mentioned the property behind hard money loan #15 was about two weeks away from going on the market. I'm pleased to say it is now on the market! Below are some photos.

This is a bit interesting. The house isn't fully staged, just a few pieces of artwork on the walls and some plants. But I still think it makes the property show better than being completely empty.

The property is listed for $400,000. My partner's wife is the owner of this one and she bought it for around $299,000. When it was bought, our estimates of comps ranged from $375,000 (computer generated) to $400,000 (opinions of two real estate professionals who have lived in the area most of their lives). Our mortgage is for $220,000 or 74% LTV based on the purchase price. With the holidays approaching, I don't expect any movement on this until after the first of the year, but who knows.

Rolling Along

Nothing much new has been happening on the investment property front. My hard money loans are being paid on time. Operations at the Houston apartment complex were essentially unchanged for September (the last month I have data for) from August. As I mentioned after the last investor conference call, the property is currently losing money, but things are slowly turning around. Management expects a return to profitability in early 2011 and a resumption of investor payments at that time. I think some of the other investors are getting impatient for distributions to start again - management sent out a notice today reiterating what they said in the yearly conference call. I guess many of the investors were not on that call so didn't know the situation.

The property behind hard money loan #15 will be ready to be listed in about 2 weeks. Back when our borrower first got the property at a foreclosure auction, it was still inhabited by the prior owners and their brood - a total of 8 adults, 2 kids, and 3 dogs. The prior owner wanted $6,000 and 1.5 months to move out. We offered $1,500 and 4 weeks. He came back and asked for $3,000. We told him no way. He threatened to take all the windows when he left. I've now found out that we did have to hire an attorney to file a suit to get him out, but as soon as he was served, he moved out without damaging the property. It cost $900 for the attorney, so we saved $600 over what we had offered him and he got nothing from us.

The property for hard money loan #14 is still on the market. It went up for sale in mid-August for $499,000. Our borrower has dropped the price now to $475,000. If I was the seller, I'd drop the price more to sell it quickly, but as long as the borrower keeps paying, let him list it for whatever he wants :-) Even with the price reduction, he's got close to a $100,000 profit waiting for him when it sells.

I don't know the current status of the property behind hard money loan #13, but I received another payment on the loan yesterday, so it's current.

Now this takes some guts (or lack of brains)

This guy is letting his house go into foreclosure because his bank erroneously charged him a $25 fee and refused to refund it. If he can buy his house back at auction for less than what he owes, he'll come out ahead.

Not sure if he fully understands what he's doing though. He seems to think that at the foreclosure, it will automatically become owned by the bank and then he can buy it back as a REO property. Does he not realize that when it is at auction, anyone can buy it? It only becomes an REO if no one buys it at auction. And if he intends to buy it himself at auction, does he realize that when you buy a house at auction, you need to pay for it in full?

eBook Price Reduction!

I've lowered the price of my eBook, A Flipper's Diary! The original price was $29.98. Get it now for only $12.95 - that's a savings over over 55%!

GMAC Finance Halting Foreclosures **Updated*

If you are a foreclosure investor, you might want to start paying attention to what company is doing the foreclosure on any property you are interested in. We've all seen the reports about mortgage companies foreclosing on the wrong property. Apparently, this is something of an epidemic at GMAC Mortgage, as they told their employees yesterday to immediately halt all foreclosure proceedings in 23 states. They are also halting the sales of all properties they have already foreclosed on and extending the closing date by 30 days. They are allowing buyers already under contract to cancel and get their deposit back, should they want.

Update: Another story says the reason for the freeze by GMAC is that GMAC employees signed about 10,000 "affidavits and other foreclosure documents a month without verifying their accuracy." The Florida Attorney General is investigating the filing of fraudulent documents to the courts.

Another Possible New Fee For Home Buyers And Sellers

Came across a story in the New York Times this morning about a possible new fee in the housing market. It hasn't caught on yet, and let's hope it doesn't.

Some developers are trying to attach a clause to the sales contract of new homes that says the developer will receive 1% of the sales prices of the home every time it changes hands for the next 99 years. Wow. New home buyers - this is yet another reason to understand every piece of paper you are signing at closing.

Status Update

Time for a status update. All my active hard money loans are current and have been paying on time. Hard money #14, which was just made mid-June, might be paid off soon. The property has been fixed up and is on the market. This guy works fast! Here's a shot of the place when my borrower purchased it:

And here it is now:

Looks much nicer. He took down the fence, which is something I probably wouldn't have thought to do. Also fixed up the landscaping. He are some pictures of the inside. He's got the place staged nicely!

And he did all this in two months. Very fast! It's listed for $499,000. Our mortgage is for $198,000.

On the Houston apartment front, we had the semi-annual investor conference call last week. Things are starting to turn around there, although the property is still in a negative cashflow situation. First, an update on the Houston economy: times are still tough there. Class B and C apartment complexes have been hit hard. (We are a class B complex in a class A location, so I'd say we are a slightly higher end class B.) Sixty-seven percent of apartment complexes in Houston are offering concessions. Rents have declined 4.1% in the months of January through April. Job losses are slowing, although employment in Houston is very erratic - the number of jobs has fluctuated +/- 30,000 over the last 1 year.

Now for the good news: Occupancy is trending up in 2010. We are currently at 92%, up from a low of 87% in January. Move outs and move ins, a sign of tenant turnover, are trending down - only about 4 in the last month from a high of 27 in June. Cashflow is negative about $4,000 a month, but this is also trending up, from around negative $15,000 a month a couple months ago. The negative cashflow is mainly due to insurance and taxes. We did have a successful appeal of the property valuation for tax purposes, so that will result in a lower tax bill. Insurance has also been renegotiated and will be lower in the future. Unfortunately, both of these items are required to be collected in an escrow account by our lender, so the reductions will not be seen immediately, as we will have to wait until the next yearly escrow analysis for the decrease to be seen.

Comparing the actual numbers with the pro forma numbers that were figured going into the deal shows we are actually fairly close. Total operating expenses on a per unit basis are $4,645 and the pro forma number was $4,470. The increase is due to higher utilities, taxes, insurance, and security. Management fees are slightly lower than the pro forma numbers.

Management is taking steps to bring down our per unit operating expenses. Besides the taxes and insurance, the biggest expense was security. We had inherited a security contract when we bought the property that was fairly expensive. That contract has since expired and we have switched to a new security company, which reduces the cost to about 20% of what it was, resulting in a savings of over $190,000 per year.  Altogether, the changes should bring our per unit operating expenses down to around $4,150 - even better than our pro forma number.

Management is also taking some unique steps to attract and keep tenants. They are contacting large employers in the area and trying to get contracts for 10% of the units. They are offering tenants a job loss addendum on their leases. This says if they lose their job within 6 months of moving in, they can resign for a new 1 year lease and get one month free rent - which they must pay back at the end of the year. So it basically delays the income for us, but could possibly keep the tenant from moving out, while also extending their lease. They are also offering a 20% discount to current or retired police officers who live on site, with an additional $25 discount if they park a marked car on site. The property is already a Blue Star certified complex, a designation bestowed by the Houston Police Department for properties that have taken significant steps to deter crime and provide a safe environment.

The loan on the property switches from interest only to amortizing in July of next year, so that will cause our loan payments to rise. However, since we are repaying principle, this is really equal to a return of our principle to us, only we won't get it until we sell the property. Management is looking to resume quarterly distributions to investors early next year. That will give them time to return to a positive cash flow and also build up a small contingency fund.

Time Is Of The Essence

Saw this article today about a couple in California that bought a house at a foreclosure auction. They thought they had a great deal, but it turns out they actually bought the worthless second mortgage, not the first. A few months after the auction, they received another foreclosure notice, this time for the first mortgage. As you know, the first mortgage has seniority, so the couple was pretty much screwed. At the auction for the first mortgage, no one placed any bids, so the property went back to the lender and the couple was able to work out a deal to keep their house. Unfortunately, their daughter and her fiancĂ©e, whom the house the purchase for, have decided to move out of state, so they won’t be living in the house after all.

There are a couple of interesting points in this story. This took place in California, where there are some peculiar laws. Apparently, it is easier for a second mortgage to foreclose than a first, which is why the bank proceeded the way it did. It sounds like the buying couple did do some basic research – they saw the recorded docs for the two loans, but since they were recorded on the same day, they thought they were the same loan. That’s where they made their mistake. There are a couple warning signs they should have seen. First, check out the loan amounts as stated in the recorded documents. They should have seen they were different. They should have also seen that the loan that was doing the foreclosing was the lesser amount, which should have tipped them off that it was a second mortgage, not a first. Second, they should have looked further than the date. I know, at least in Arizona, documents are recorded not only with a date, but also a time. I would imagine California does the same. If two documents are recorded on the same day, check the time to see which was recorded first. Personally, a friend of mine encountered a similar situation here in Arizona. He was buying a foreclosed property and someone else was trying to save it from foreclosure. It came down to the time each party recorded their document. My friend’s document was recorded about 15 minutes sooner, so he got the property.

Happy Anniversary!

This blog was started 6 years ago today! Wow.. Times flies!

I was planning on posting an update about the apartment complex and a few other odds and ends today, but I've gotten swamped with other things, so I'll just say "Thanks for reading!",

Breaking The Bank-Appraiser Cabal

I got a call the other day from the bank that holds the mortgage on my house. They wanted me to come in and talk with them about refinancing. They thought I could get a better rate. So on Saturday, I went in and spoke with a lady in the refi department. I could have gotten a real sweet rate – if I didn’t have my home equity line of credit. I got the HELOC near the peak of the housing bubble, so the combined value of my HELOC and my mortgage is well over what my house is worth today. That meant I had to go into a different loan program with a higher rate and I wouldn’t be saving very much.

But while I was talking to the woman, I found out an interesting fact. Now, back when I was rehabbing and renting properties, I did refis and loans all the time. I’ve probably been through the mortgage process as a borrower 15 times or more. I’ve got a fair idea of how the game is played. Or, I thought I did. I haven’t gone through the process since the housing bubble collapsed. Turns out a couple of things have changed. The biggest change is that the bank no longer can have any contact with the appraiser. The bank just orders an appraisal and the order goes to the appraisal company, who then doles it out to one of their employees. The appraiser contacts the borrow or home owner to schedule a time to look at the property. I think this is a positive step. I remember thinking how convenient it was that the appraisal would always come back right at or slightly above the sales price of the house. There seemed to be an obvious game going on where the bank would hint to the appraiser what figure they were hoping to get. And since the bank paid the appraiser, there was a strong incentive for the appraiser to meet that number. I’m sure this was a big factor in the housing bubble.

Of course, the new prohibition does not fully stop this practice. The appraiser still must talk to the borrower (assuming this is a refi and the borrower is living in the property), so the borrower can still tell his target value to the appraiser. I don’t think there will ever be a way around this. But I have heard from appraisers that they are also limited in the adjustments they can make. They have strict limitations on what improvements they can include. I had one appraiser tell a friend of mine that short sales and foreclosures now really hurt property values because appraisers are pretty much stuck using their sales price as comps and are very limited in the adjustments they can make. I would imagine one foreclosure or short sale in a neighborhood wouldn’t be too bad, but a neighborhood with several could see the property values really plummet.

In other news, it looks like the former owners and occupants in the hard money #15 property are being jerks. If you recall, he originally wanted $6,000 and one and a half months to move out. My partner offered $1,500 and four weeks. Now he is asking for $3,000. In the words of my partner, “fat chance.” The occupant has threatened to take the windows if he is not paid that much. Our lawyer advises to call the police if he does. (And yes, we do have insurance on the property.) Looks like this will be going to court to get the people out. And there are lots of people – 8 adults, 2 kids, and 3 dogs. Yeah, there will probably be a bit of remodeling that needs to be done when they leave. Such is a life of a foreclosure investor.

My others loans are doing well and paying on time.

Another New Loan Made

Just a day after starting a new hard money loan, my partner contacted me with another opportunity. This is another single family home, 1,900 square feet, 4 bedrooms, 2 baths. The outside looks nice:

But the inside needs about $30,000 of work. The previous owner / occupants included 7 adults, 2 kids, and 3 dogs. And no stove. You can imagine what it looks like inside. The previous owner tried to sell the property themselves, but, given the poor interior condition, was unable to find a buyer.

The borrower for this loan is, once again, my partner's wife. The property was purchased for $300K, and we are writing a mortgage for $220K, giving a 74% LTV. (I've rounded the numbers for simplicity, so if you do the math, you'll get a 73.3% LTV.) Fixed up, the property should sell for $390K. My partner used to live in the city this house is in, so he's got a better than usual knowledge of the area. He figures it'll take 3 months to get the place ready for sale.

The old owner is still occupying the property. He offered to leave in one and a half months and wants $6,000. My partner countered with four weeks and $1,500. No response from the guy yet. Technically, he doesn't own the house anymore, so we shouldn't have to pay him anything to get him out. But it would probably cost about $1,500 to hire an attorney to get him out and that process would take one to two months anyway. Might as well try the honey before the vinegar.

Labeling this one hard money loan #15. This one will take another third of the funds that got freed up over the past two weeks. I'm still looking for one more loan for the final third of my funds.

New Loan and A Sign Of The Times

As I mentioned last week, I had two loans get paid off recently. A third loan, hard money loan #8, was just paid off yesterday. This loan was somewhat unusual in that it was actually carried to the full 1 year term. I don't have any information on if the property sold or if the borrower just refinanced to pay us off and he still is working on or trying to sell the place.

So, with the exception of one loan through my self-directed IRA, my money is all just sitting around and not earning any interest right now. Or I should say, was just sitting around. Just got details of a new offer yesterday that I will invest roughly a third of my funds in. The borrower is a referral to my partner from a mutual friend. The guy knows what he is doing and rehabs houses for a living. He is also a member of CCIM, an institute of commercial and investment real estate professionals. The property is a single family home in Oakland, California that was purchased at a foreclosure auction. The property was purchased for about $265,000 and our mortgage will be for $198,000, giving us a LTV of 75%, based on the purchase price. The current value is approximately $323,000, so the LTV with that figure is about 61%. Loan is standard terms, with a slightly lower interest rate: 9%, interest only, 1 year term. I'll call this one hard money loan #14.Here's a picture of the property:

Not too pretty, but that's what foreclosure investing is all about.

I'm starting to see many indications that the real estate market is turning around. First, obviously, are the three loans I had close in two weeks. Those were sales in California. But even closer to my home here in the Phoenix area, I am seeing signs of a turnaround - literally. I passed this sign on the way home yesterday:

Note the "We're back!" line. This particular tract has been sitting vacant for two years. This sign was taken down two years ago and has just now been put back up. (The "immediate move-in" is something of a lie as there are no houses built yet.) On other empty lots around town, I am starting to see signs advertising new stores that will be built and should be open in a year or less. Perhaps the worst of the real estate mess is behind us now.

Two Loans Closing This Week

Hard money loan #12 is closing today. This one only lasted two months. That’s the shortest loan I’ve made in a while, possibly ever. The borrower almost got a discount for paying it off so quickly. The standard loan note my partner uses generally provides incentives for early payoff if made within 30 days of funding or 60 days of funding. The 60 day cutoff was June 5, so the borrower missed getting a $3,560 discount by 3 days.

Hard money loan #11 is still scheduled to close on Friday.

Got my first check from hard money loan #13 today. This is the one that I’m using my self-directed IRA for. I must say, I’m pretty happy. That one payment is already more than my traditional IRA that is invested in the stock market has made this year. Of course, I still need to recoup the costs of setting up the self-directed IRA, so technically, I’m still in the hole on this one. But getting a check each month feels a lot better than helplessly watching the stock market gyrate.

Loans Closing and Things Looking Up

It looks like hard money loan #11 is scheduled to close next Friday, the 11th. All in all, my partner says the California area where we have our hard money loans seems to be a seller’s market right now. We’ve currently got four properties in escrow. A couple buyers backed out, but new buyers were quick to appear. I expect to have my other loans paid off soon.

In multi-tenant property news, I received a nice detailed state of the market analysis from one of the principles involved in my Houston apartment deal. He lives in Arizona and his report is about the Phoenix area. For background, he talks about the factors that all conspired to get  us where we are today. Of course, the housing bubble hit the apartment arena as well as single family homes and people were buying apartments based on wildly optimistic pro forma numbers. But then the market softened and the large numbers of single family homes started hurting the apartment market. Many of these SFHs were put up for rent or left for foreclosure. Then the home buyers tax credit kicked in and many renters stopped renting and took advantage of the tax credit and glut of SFHs to become home owners.  But things are looking up now. Jobs are starting to come back and layoffs have slowed. Local businesses, such as restaurants and home improvement stores, are seeing business pick up. It looks like the apartment sector is starting to make a comeback. This person had stopped buying properties in the Phoenix area in 2005, when valuations were sky high. He now feels it might be time to start buying again.

April Apartment Complex Report

Time for another Houston apartment update! This report is much nicer than the last one. Occupancy has increased to 93% from 90% in January. This is a very nice improvement over the declining values we were seeing the last couple of months. As occupancy rose, so too did revenue – a $10,000 increase in April over March. Management expects another $5,000 increase in revenue in May. Rent concessions are down about $2,000 from March, but still at a fairly high $20,000 (!). Hopefully, as occupancy increases and the economy improves, this number will continue to decrease. As a comparison, the budgeted amount for concessions is $5,000 per month.

The good news of increasing revenue was counter-balanced somewhat by some not so good news. Our monthly real estate tax escrow amount increased by almost $9,000 per month. This was partially offset by a decrease in insurance escrow of about $6,500 per month. (The new insurance cost is about half of the old cost.) The silver lining is that the property’s assessed value declined by 5.5% in 2010, so the real estate tax escrow next year will go down again.

Expenses increased a bit. The quarterly unit inspections took place and resulted in an increase in the Repairs and Maintenance category. Some capital expenses also took place - one of the central water heaters failed and had to be replaced.

Overall, the property still lost money in April – about $17,000. Hopefully, the property will return to profitability soon!

Loan Calculations

I seem to be in a financial clean up mode lately. First, I started converting all my paper bills and documentation to electronic form. Now, I’m taking on our debt. I pay off our credit cards in full each month, so typically the only debt I have is my home mortgage. But, last month, we bought two new cars. Prior to that, we had been car-payment free for several years. In all honesty, the idea of having two car payments makes me a little uncomfortable. That’s $900 a month of expenses I didn’t use to have that I now do. I’d love to go back to not having any car payments.

We recently got our tax refund – almost $10,000. Normally it’s never that big, as I don’t believe in giving Uncle Sam an interest free loan, but I spent most of last year working as a self-employed, independent contractor so I was able to take advantage of some nice deductions, the biggest of which I think was my mileage deduction for commuting. I’ve got a 66 mile round trip commute, so that really adds up over a whole year. My first thought was to put the refund towards my car loan. This loan amortization calculator is really nice in that it gives you options to add a couple different types of extra payments to the mix and show you how they will affect the loan. By applying my tax refund to the loan, I will shorten the length of the loan by almost two years (it’s a 5 year loan) and I’ll save about $1,500 in interest charges. Nice.

Then I went to lunch and another thought struck me while eating. I had just made a hard money investment that was earning 10%. I had some additional money saved up in a bank savings account. Maybe I could combine my savings with my tax refund and invest that and then use the income from that to pay my car loan. That’s the basic tenant of passive income – have your money work and make your payments for you. I did some calculations and discovered that, in order for investment income at 10% to cover my car payment, I’d need to invest close to $55,000. That’s a bit more than I have available, so this option is out. (Although my car loan is at 4.25% and I could invest at 10%, I’d need to invest a lump sum of more than twice my loan balance to cover the loan payment because my loan payment includes amortized principle repayments, whereas my passive income would be interest only payments.)

Back to the original plan. Paying off my car loan two years early is nice. It still means I’d have a car payment (two actually, since my wife has a new car too) for at least three years. I just couldn’t really get too excited about this.

Then I started looking at our budget. I’ve been using this great iPhone app called iReconcile for a couple of months now and I’ve also been meticulously categorizing each expense I have. The result is that I have a couple months worth of actual expense data I can look at and report on. I ran through our budget numbers and saw we’ve still got a decent cushion in our income, so I should have no problems sending extra money towards our car payments. Then another thought struck me. We are currently budgeting 15% of our income towards savings. Been doing that for years. We’ve got a nice size emergency fund built up now that should be able to cover us for several months should either my wife or I lose our job. What if, in addition to putting my tax refund towards the loan, I also redirect that 15% from savings towards my car payment? Using that nice amortization calculator again, I saw I could have my car paid off in 11 months!! And I’d save over $2,300 in interest!! Wow! And after my car was paid off, I’d switch to sending that money towards my wife’s car loan in addition to her regular payment and her loan would be paid off in the following year! Awesome!! And, carrying this further, I figure that after two years of doing this, I’d be well-versed in making due without the money I had been sending to the loans, so I’ll keep sending the money off – to my savings account this time. I figure I’ll be saving close to $2,000 a month. After doing that for a while, I should have a nice chunk of change to invest in hard money lending at 10% (hopefully the return will be back to the more normal 12% by then). I’ll build that nest egg up so the next time we need to buy cars, we will be able to use our passive income to pay for them!

There is a drawback to this plan – I will not be putting any money towards savings for two years. As I mentioned earlier, I’ve already got a several month cushion built up, so I’m comfortable with that. Furthermore, the extra loan payments are voluntary. If I suddenly run into a situation where I need to start saving again, I can just stop sending the extra payments in to the loan. Lastly, my wife works for Arizona State University. Due to state budget cuts, there is a good chance that if the one cent sales tax increase that will be voted on next week does not pass, she will lose her job due to the Draconian cuts that will have to be made in education spending at all levels. The general consensus is the tax will pass, but I think I’ll wait a couple days to make sure before I start sending any money anywhere.

This isn’t probably exciting for many readers, but it is for me. I feel like I am *that close* towards finally having enough passive income to pay for something big. This is a goal I’ve been striving towards since I started this blog almost 6 years ago. I also am starting to see and feel the “snowball effect” of saving and investing. It takes a long time to get a good chunk of money saved to generate any kind of significant passive income, but once you get there, things just start growing faster and faster.

First Investment With Self-Directed IRA

It’s been a very long time in the making – five months – but I am now making my first investment with my self-directed IRA! I opened the bank account two weeks ago, the hold on my initial deposit check ended last week, and now I’ve found a new hard money investment. This one will be all the more sweet since it will be made using funds from my self-directed Roth IRA, and thus the profits will be tax-free!

My partner has another hard money lending opportunity. This one is for a mortgage of $224,000 on a property the borrower purchased at auction for $321,000, giving us a 70% LTV ratio.  (Well, loan to purchase price ratio, anyway. The actual value of the property is somewhat variable, as I mention below.) The property is a single story, single family home in central California. It was built in 1951 and is a 3 bedroom / 2 bath property with 1020 square feet. It has an attached single car garage. The previous owners were out of town owners renting it out.

Comps range from $380,000 to $420,000 from another investor who has never seen the property, but knows the area, to $370,000 from automated sources (Zillow and ForeclosureRadar) to $350,000 from a Realtor who looked at pictures of the property but did not check the MLS. Given the wide variety in comp values, I would expect this property to take a little longer than typical to sell. Back in 2007, the last time it was listed in the MLS, the average days on market for the area was about 4 months. And the listing price for this property back then was $600,000. This property is located in the same city the property for hard money #10 was in.

Investment is standard terms – 10% interest only payments, loan term of 1 year with balloon payment due at loan end. This loan will be labeled hard money #13.

Harry Potter And The Mountain Of Paperwork

Last week, I wrote about my decision to try to move all my documents to electronic format. I've spent the last week converting some of them. Luckily, several of the companies I deal with provide access to electronic statements online, even if you had not signed up for them in the past. This means I was able to download, for example, the last 10 years of my brokerage statements from Charles Schwab. That saved me a lot of scanning. For the things I couldn't download, I have slowly been scanning documents. I've gotten through about one and a half drawers of my 4 drawer file cabinet. Here's a picture of the documents I've converted to electronic form so far:

In case you can't read it, that's a tape measure hanging off the pile. It's showing the stack is 9 inches tall. I just waved my trusty scanner at the pile and Reducio! Gone! Now I've got lots of shredding to do.

My online backup has also been proceeding over the past week. It's currently backed up about 60% of the 50 GB of data I have selected. (Since I have unlimited storage, I selected others things to back up besides the  electronic documents I am creating, such as my photos and MP3s.) Once this initial backup has finished, subsequent backups will be almost instantaneous.

In real estate-related news, it would seem the market in California, or at least one part of Calfornia, is recovering. The property I made hard money loan #11 against is finished being rehabbed and is now on the market. It was put up for sale on a Monday. By Saturday, the seller had received seven offers at or above the list price! We figured it would sell for $700,000, but it looks like the seller may be able to get $725,000 for it. If the seller accepts an offer and all goes well with escrow, the loan should be paid off by mid-June.

I also finally got everything all finished in setting up my self-directed IRA. I opened a bank account for the LLC yesterday. Now I just have to wait 1 week for the bank to release the hold on my deposit check and I'll be able to start hard money lending with my IRA!

Taming The Paper Beast (Updated)

I have three filing cabinets in my home – a tall four drawer letter size model for personal stuff, a two drawer lateral file cabinet for my real estate-related documents, and a two drawer letter size filing cabinet for my hard money lending documents. The four drawer cabinet is full, the lateral cabinet is getting there, and the two drawer one is still relatively empty. I’ve thought about going paperless before, but have always been somewhat afraid to pull the trigger. I did not want to give up the security of a physical bill or invoice. Over the past several months, I’ve become more comfortable with electronic documents, as I’ve used them more and more. And now, I’ve been inspired by Cliff to try to go paperless as much as possible. This means not only signing up for paperless statements from my utilities, brokerages, etc., but also converting my existing documents to electronic versions. The benefits are too great to ignore – I can rid myself of reams of paper and at the same time, create records that I can store longer and move easier than paper records.

I already have the needed equipment – a legal-sized scanner with auto-feed capability, a shredder (for destroying documents after I have scanned them), and a computer. The second important piece of this puzzle is a method for backing up the electronic copies. I currently have an external drive that I back up  my computer to daily, but I also want an off-site backup location in case my house burns down. I think I’ve decided to go with SOS Online Backup. They are definitely not the cheapest – they charge $50 a year for 15 GB of storage, whereas most other companies give you unlimited storage space for the amount. What swayed me to them was their great reviews from PC Magazine and what seems to be their ease of use. I also like that they can back up files that are in use, which is important because I leave my email client open all the time and the .pst file will still be able to be backed up. In addition to my electronic documents, I will also be backing up my digital photos, which are priceless. Right now, I have about 8 GB of data. That leaves another 7 GB for my new scans. I figure if I need more and SOS can’t provide it, I can always switch to another online backup provider.

An added benefit of switching to electronic records is that now everything will be searchable. Windows Search can, with a plug-in, index the contents of PDF files, which is the format my electronic records will be in. The old documents I am scanning myself will not be indexed because I will just be making images of them and not running any OCR software against the images, but going forward, the documents I get from the companies I deal with will be searchable.

The final step of this process is deciding on a filing method. How will I organize these files on my hard drive so that I can find what I need quickly? I actually read an article about this a week or so ago, but I can’t find it again. I can’t even remember if I read it online or in an actual magazine. Anyway, the typical choices in how to file come down to two methods – grouping by date or grouping by type. In other words, should I put all my invoices from January in one folder, or all the invoices from my electric company in one folder, all from the gas company in other, etc.? I’ve opted to go for the later method. I’ve also broken it down somewhat more by breaking out documents I only retain for one year and those I want to retain forever. Here is an image of the folder structure I’ve come up with. It’s not perfect and there are some holes – for instance, what if I get a combined bill for different services, such as internet and television from one provider? That doesn’t really fit into this scheme (unless I made a new folder labeled “Entertainment”), but I currently don’t have any situation like that, so I’m not going to worry about it. This will probably change a bit as I add items, but I think it’s a good place to start.

I also want to come up with a naming convention that makes it easy for me to identify what the contents of the document are without opening it. I’ve decided on the following: Company-N-Description-MMYYYY. “Company” will be the company the document is from, “N” is a single letter that will indicate if the document relates to me, my wife, or my daughter, “Description” will be a brief description of the document, and “MMYYYY” will be the month and year of the document. For example, a scan of my Roth IRA statement for this month would be named “Schwab-S-Roth IRA-042010.pdf”

With all the planning out of the way, I’ve started contacting the companies I have accounts with and switching to electronic records where possible. The longest part of the process will be scanning in all my old paperwork. And I still won’t be completely paperless. You’ll notice in the above folder structure that there is no spot for tax returns. I’m still hanging on to those in paper form for a while. Old habits die hard.. I also do not have any spot for my business documents – real estate buying and selling contracts, my business banking statements, etc. Those I’ll add in later. For now, I’m going to concentrate on my largest pile of paperwork, which is personal stuff. After that, I’ll move on to my business stuff, and then, hopefully, to stuff like owner’s manuals and documents for big ticket items I’ve purchased like entertainment systems, televisions, washers and dryers, etc. And at that point, I may be able to get rid of a filing cabinet or two!

And in other news, as I predicted a little while ago, hard money loan #4 has been paid off. I received the final payment yesterday.

Update: I tried the free trial from SOS Online Backup and have decided I don't like it. My first attempt at backing up files resulted in a status message that said "xxxx files backed up, 8 files not backed up. They will be backed up next time." What? They didn't say why or which files were not backed up. Their software does not have a log viewer. They have a log, but it simply gives the date and time of when the last backup was run. I was able to hunt around on my PC and find a more detailed log that listed the files that were skipped, but that info was buried amidst a bunch of other stuff. I have instead gone with Carbonite. That is the vendor my work uses, so I've got some experience with their product. For $55 a year, you get unlimited storage. I also like that their software gives you an option to put a colored dot on file icons. Green means the file has been backed up, yellow means it has a back up pending, and no dot means the file is not being backed up. If you are interested, Google "Carbonite coupon code" and you will find a link you can use to get a 10% discount.

Self-Directed IRA Almost Ready To Roll

I received my LLC paperwork package in the mail two days ago. Today, I received confirmation that the LLC creation notice has been published in a newspaper of record (as required by law). My next steps are:

  1. Send the IRA custodian instructions to issue a check to the LLC for the purchase of membership shares. This is where my IRA takes ownership of the LLC, thus giving me a self-directed IRA.
  2. Return the membership roster and member share certificates to the company that set up the LLC for me. (The company is related to the IRA custodian, but not technically the same company.)
I could go open a bank account now using the LLC documents I have, but I will wait until I get the check first, since I don't feel like trying to see if I can open a checking account without making a deposit. Why complicate things?

I'll get all the forms mailed out tomorrow, so I figure it should be a week before my check arrives and I can open a bank account.

One loan ends, another starts.

Sometimes everything just falls into place at the right time. Hard money loan #10 was paid off and just a day or two later, another opportunity came up. I can roll my funds into that one with no time spent not earning interest while searching for a deal.

The new opportunity is a single family house, 5 bedroom, 2.5 baths,  in a nice area of San Leandro (Northern California). The borrower is a well-experienced borrower who we have done business with in the past. At the height of the real estate boom, this property sold for over $800,000. Of course, that’s pretty much a worthless number now and I am always amused when I see such figures in the analysis data that gets sent to me. The more important numbers are as follows: The property was bought at auction for approximately $475,000. The buyer is putting  25% of his own money into this and we are lending the remaining. After repair value of the property is approximately $560,000 with an average days on market of just over 1 month. Using the ARV of the property, our LTV is 63%. Using the buy price, it is, as mentioned, 75%. Nearby and similar properties rent for just over $2,700 a month, so if we foreclose, we are looking at $33,000 gross rental income per year. It is in a stable neighborhood (few other houses for sale).

Here is a picture of the front of the property. There isn’t much fix up needed and the property is already vacant. We expect this loan will be paid off in 3 to 6 months, although the loan term is for 1 year. Standard deal – 10%, interest only, 1 year balloon, no pre-pay penalty. This will be labeled hard money #12.

All is not quite so rosy with the apartment complex in Houston. The last month I have data for, February, showed a decline in revenue, even as occupancy increased. This was due to increased concessions to get people to move in. Occupancy is fluctuating between 88% and 90% as the area continues to be hit by poor economic conditions. Cashflow is running breakeven. Management expects it to remain this way through the end of the first quarter and to pick up in the second quarter, as occupancy is increased.

Hard money loan #4, the motorcycle loan I did for a co-worker, should also be paid off in a day or two. I was told the payoff check was mailed yesterday.

The self-directed IRA is proceeding slowly, mainly due to a comedy of errors. First, I filled out the wrong paperwork to get the thing started. The company I am working with created an LLC for me. They were waiting for some paperwork to be mailed to them from the Arizona Corporation Commission. But the ACC mailed the paperwork to me, because I am the manager. It wasn’t until a month went by that I found out they were waiting for paperwork I had already received. I faxed it over to them last week, and I think that is all they need now. They have to send me my LLC documents, and then I can go open a bank account.

On a personal note, my wife and I each picked up a new 2010 Prius two weeks ago. We are both loving the cars. I’m averaging 53 miles per gallon, despite having a daily 66 mile round trip commute, mostly at highway speeds. I love being able to fill the tank less often and for less than I did with my old Avalon, which took $42 to fill up. The Prius takes $21. We each got the solar package, which uses a solar panel in the roof to power a fan to exchange the air in the car with outside air while it’s parked in the sun, keeping it cooler. Here in Arizona, that’s a huge benefit, especially since we haven’t gotten the windows tinted yet. With the purchase of the cars, we went from having no car payments to two car payments, so the passive investing income I’m getting will come in handy.

Big Update

Wow..It’s been almost three months since I started the process of setting up a self-directed IRA. Time flies! I am approaching the end to setting everything up, I believe. Probably half of the delays were my fault. First, I filled out the wrong paperwork – I filled out the Traditional IRA application instead of the Roth IRA application. I didn’t catch that until the account had been opened, so then we had to close that account and restart the process using the correct forms. Then, Schwab, where I had the assets I was funding this IRA with, refused the request to transfer funds out. It took three tries. The request kept getting rejected because the paperwork from the new IRA custodian didn’t specify “Roth IRA” in one location on the paperwork. Once we got that straightened out, the transfer went smoothly. But each rejection took a couple of weeks, so we lost a lot of time there. After the funds are transferred to the new custodian, the next step is the creation of an LLC. The IRA will then purchase all the shares of the LLC, thus giving me, the LLC manager, control of the LLC funds.  Well, I checked with my account rep and he told me the fund hadn’t arrived from Schwab yet. Turns out, he was checking the old traditional IRA account that we incorrectly set up initially. Once I pointed this out, he checked the correct account and saw the funds had been transferred. Last week, he started the LLC creation process. I checked the Arizona Corporation Commission’s website this morning and found that the LLC was created yesterday. The next step in the process (and the final one, I think) will be to open and fund a bank account. I believe I will be getting a letter from the LLC custodian to take to a bank that will allow me to open a bank account in the name of the LLC. I’ll contact my account rep later today and find out the next steps I need to take.

Had an update on the Houston apartment complex. I missed the semi-annual conference call, so I only have the info in the monthly reports to go on. It looks like the economy is finally catching up to the Houston market and more jobs are being lost there. Occupancy for January went up slightly and early February also showed some gains. Occupancy is at 90%. Total cashflow was negative $911 in January, the first time the property has had a negative cashflow since we bought it. Management expects cashflow to remain low for the first quarter of this year. This property continues to outperform other similar properties in the area however. The overall market occupancy is 84.8%. The submarket we are in is running 86.6%. As mentioned earlier, we are at 90%, so I feel management is doing a pretty good job. Rent concessions are actually about $200 below budget for the month of January. Higher insurance and real estate tax escrows continue to adversely impact the bottom line. Management was looking into obtaining new insurance and hopefully that process will be completed soon.

On the hard money loan front, things are running smoothly. I have two loans that will likely be paid off soon – hard money loan #4 and #10. Loan #4 was a loan on a motorcycle to a former co-worker of mine. He was recently laid off (about 1 year after I was also laid off) and he is selling the bike. He thinks he has a buyer for it now. The property for loan #10 has been on the market for about 3 months. The owners have it priced a bit high. We knew going into this one that their estimate of the value of the property was probably too high, but even using our lower estimate, the deal still looked good. Now it’s just a matter of the owners coming to the same conclusion on their own. We estimated the property was worth $320,000 and loaned $192,600 in the deal. The owners started out listing the property at $378,600. They have lowered it now to $348,600. They have the property fixed up nicely and have staged the house so it shows well. Even so, they’ll probably have to lower the price again. They are current on payments though, so I’m not worried.

Loan #11 is progressing as well. We had to evict the previous owner to get him to leave, but that process only took 1.5 months, which is relatively quick. The property needs paint, carpet, tile, and some minor flooring work. It should be set to go on the market in 3 weeks. This is the property bought by my partner’s wife, so I’m sure things will move swiftly.

And lastly, my wife and I took a little trip to Las Vegas last weekend. We got a deal from the Wynn for 3 free nights plus $300 in free play and took advantage of it. When we got there, my wife wanted to play the $300 credit on a $5 video poker machine. She sat down and, on her very first hand, got this:

Amazing!! The rest of the trip sort of went downhill from there, but it was a heck of a way to start! And it was nice knowing that we were playing with their money for basically the entire trip.

Kiyosaki's Seminars Investigated

Canadian TV has a story on the Kiyosaki's Rich Dad seminars. The upshot seems to be that they are basically non-educational and nothing more than extended sales pitches for more products and seminars. (I do have to disagree with the story's characterizations of lease-options and preforeclosures - these are valid investments and I have made money using both of them.)

Personally, I tend to agree. I've never been to a seminar I had to pay for. I just don't see the point. Kiyosaki has written lots of books, many of which I've read. I also was an active participant on the discussion forumson his website, which is where I met other RE investors and got most of my financial and real estate education. These are free or low-cost methods of learning. The only Kiyosaki seminar I attended was a free one that lasted a couple of hours. This was long ago – back before he got the image consultant and was still wearing Hawaiian shirts to appearances instead of suits. I’ve gone to a couple of other events he’s been at, all of which were free.

I can see where he is going and he is going to face increasing criticism like this. At one of the events I was at, he was talking about cashflow and how one of his goals was to increase it. He said he was currently getting about a million dollars a month in cash flow and he had talked with Oprah, who was cashflowing about a million dollars a day. His goal was to get to her level of cashflow.

Now to get to that level, you need to sell to a lot of people over and over. Books alone aren’t going to cut it. So I can see him branching out into other areas – seminars, videos, etc. And you can’t give seminars to tens of thousands of people on your own, so he has to hire or partner with other seminar companies. To get the recurring revenue, you also need to promote the need for more seminars, which seminar companies are good at doing.

Oprah has created her empire through television. She has her own show and it is her alone that millions of people watch and identify with. She is not giving seminars using other people and companies to promote her name. That is the big difference. She has a level of control over her empire that Kiyosaki can never have, not with the model he is using. It’s possible he knows this. He tried to go the television route before. He had a show on a local Phoenix television station that lasted a couple of episodes before it was cancelled. His wife also had a show that lasted slightly longer. Since the television route failed, the only other option he has for reaching the huge number of people needed to obtain his cashflow goal is by using surrogates to spread his message. By definition, he has therefore given up some control of his message by allowing others to teach in his name.

The other problem is his subject matter. Oprah talks to people about books, feelings, ways to live your life, and other topics that typically do not require her fans to invest large sums of money. Kiyosaki however, is teaching about real estate and, increasingly, stocks. Investing in these can require (although not necessarily) large amounts of money. Unwise or poorly educated people can, and have, lose all their savings and wind up bankrupt. Further, the law of averages guarantees this will happen to some of Kiyosaki’s followers, no matter what he does. Because the losses can be so great, dissatisfied followers will be more vocal and receive more publicity than dissatisfied followers of Oprah would. If you buy a book that Oprah recommends and you don’t like it, you’re out $5 to $15 bucks. If you buy a rental property like Kiyosaki says and you can’t manage it, you could go bankrupt. That’s a big difference. It’s why, in my opinion, Kiyosaki will never reach his cashflow goal. The number of people required to reach such a goal ensures there will be people who fail and failures in his field of play are enormously magnified, which in turn, discourages others.

This is not to say I am anti-Kiyosaki. His first several books are still filled with valid advice: stop buying liabilities, start buying assets, increase your cashflow. I still believe substantial passive income should be a goal of everyone. But it’s hard to continue to create content on this narrow topic. I stopped reading his books after Retire Young Retire Rich because I felt he was repeating himself.

Bottom line: learn and live Kiyosaki’s core message from his first couple of books. Don’t bother with expensive seminars. Educate yourself by meeting with other real estate investors in your local area and from reading free on-line communities. Be skeptical but keep an open mind. Check out the accomplishments of those whose advice you feel inclined to take to make sure they know what they are talking about. Don’t expect to get rich overnight.

Man Bulldozes Foreclosed Home

An Ohio man lost his home to foreclosure and bulldozed his house rather than let the bank take it back. It seems he was sued and the IRS placed a lien on his home. The bank claimed the home as collateral.

From what I can tell, it sounds like the guy got a loan from the bank and built the house himself. He owed $160,000 on it. The bank started foreclosure. The home was supposedly worth $350,000 and the owner had an offer to buy it for $170,000. The bank rejected this, saying they could get more for it at auction. So the man decided he would return the property to the way it was when the bank gave him the loan - just an empty lot - and he bulldozed the house.

As much as I hate to say it, I have to agree with the owner here. The bank was just plain greedy. He had an offer that would have paid off the bank completely, but the bank rejected it because they thought they could get more money. That was just stupid.Whoever made that decision at the bank should be fired.

Now there is probably more to this story. For example, why did the IRS put a lien on his house and how much did he owe them? It might be that the $170,000 was not enough to pay off the IRS and the bank, which is why the bank rejected it. As you know, IRS liens get paid off before any other liens, so maybe the bank would have lost money with that offer. If that's the case, I would have to side with the bank. But, lacking any info to the contrary, I think the bank screwed up.

I Started Another Blog!

I started a second blog about my iPhone and what I have done to customize it.

You can find it here.

Hard Money Loan #11

My partner finally found another property to invest my principle from hard money loan #9, which was paid off a little over a month ago. Hard money loan #11 is on a property picked up for one cent over opening bid at a foreclosure auction in San Ramon, California. I normally don't post photos of the properties I am lending on here, but this one is just beautiful, so I have to. For a foreclosure, this is in excellent shape.

This was a rental property and my partner spoke with the owner (who was being foreclosed on). He said he has two tenants living in the property who are paying him $1,600 a month in rent. The lender sent the tenants a letter stating they can live in the property for up to 60 days after the sale. Not sure what authority they have to make that promise since after the sale, it is no longer the lender's property and they should have no say in what is done with it. But anyway, when my partner was there, the tenants were loading a U-Haul, so they don't seem to be planning on staying.

The house was purchased at auction for $577,000 cash and the first mortgage I am a part of will be for $400,000. This gives a LTV of 69% based on the purchase price. The property was purchased in 2004 for $860,000. Current estimate of worth is between $650,000 and $700,000. Buyer is my partner's wife, who has a credit score in the 800s. The interest rate is 9%, which is one percent less than what I normally get. I consider it an employee discount :-) Mortgage is for one year, but we expect it to be paid off in 6 months.

New Year, New Opportunities

The holidays were a pretty busy time for me and I realized I neglected to write about the performance of my Houston apartment complex investment. I also just got the update for December, so I’ll write about both now.

In November, occupancy dropped to 90%, due in part to the declining Houston economy. This property still continues to outperform the other apartment complexes in the area by 3-5%. The manager expected vacancies to remain at this level though December due to the holiday season, but expressed hope that rentals will increase after the first of the year. Cash flow decreased to just under $4,000 for the month and was impacted by higher insurance costs and real estate tax escrow requirements, as mentioned in the last update.

For December, occupancy remained flat, as expected. The submarket we are in declined to an overall occupancy of 87%, so we are still ahead of the curve. Unemployment in the area has increased from 6.5% in Q1 of 2009 to 8.4% in Q4 of 2009. Obviously, that affects the availability of renters. The Managers are cautiously optimistic for 2010 because job losses have slowed and they have increased their marketing efforts to attract new tenants. Cash flow dropped to just around $350, still impacted by higher insurance and tax escrow requirements. The good news is the management has obtained new insurance that will reduce the cost by about 30%, which translates to a savings of about $35,000 per year. The decrease in cash flow means there will be no end of year distribution to investors. For 2009, investors so far have received a 6.75% annual return overall. Management fully expects investor payments to continue next quarter. The semi-yearly investor conference call will be held the first week of February and I’ll have more info then.

I continue to receive on-time payments on hard money loans #10, 8, and 4. HML #9 was paid off at the end of December and that money is sitting with my partner looking for a new investment. We had one lined up, but it was a short sale and at the last minute, the bank decided to reject the offer, so that fell through.

My move towards a self-directed IRA is making progress. I have converted my rollover IRA to a tradional IRA and then to a Roth IRA. The next step is to transfer the funds to the company the sets up the self-directed IRA. I was planning on going with the iTrust product, but after discussion with the company, have realized that the LLC product, rather than the trust, is a better fit for what I will be doing. The only thing holding this up is that I haven't had time to fill out the paperwork yet. I hope to get that done this week. I'm not in a huge rush as it seems the hard money opportunities are slowing down a bit. My partner is noticing increased competition at the foreclosure auctions.

And finally, it’s been over a year since I was laid off from my day job, but I will finally be hired as a full-time employee again come next Monday. The company I have been working as a contractor for for the last nine months or so has decided to bring me on board permanently. While my passive income is not yet high enough to cover my living expenses, it was high enough to cover the expenses of my loans and credit cards during the year I was laid off. (I normally don’t carry a balance on my credit cards, but the layoff changed that temporarily.) It was a huge relief knowing those bills were covered during the times I had no income coming in. My practice of putting 15% of my paycheck into a savings account also helped my ride out that year. This whole experience has taught me the importance of both passive income and maintaining an emergency savings account.

HML #9 paid off

Between Christmas and New Years, hard money loan #9 was paid off. I made a couple thousand dollars on it. I'm leaving my principle with my partner for investing in another loan when he finds a good one.

Over Christmas, we had some out-of-town relatives staying with us and one night, my brother-in-law handed me a real estate listing for a property that was literally down the street from my house. It was listed for $90,000! Being that I live in the neighborhood, I know that property was worth at least $250,000. So we walked down the street to look at the house. It was night, so we couldn't see much, but we could tell it was still occupied. It looked to be in good condition on the outside. The listing said it had a pool. Back at home, I did some more research. Obviously, this was a foreclosure or pre-foreclosure, but I couldn't find anything in my search of public records. No notice of foreclosure auction, no judgments against the owner, nothing. If I had to go based on my research, I'd say the owner was not in any sort of financial difficulty at all.

The following day, I called the listing agent and asked if the $90,000 price was correct. He said it was, although he had received offers so far up to $150,000. He confirmed it was heading to auction. The agent's cell phone cut out, so I didn't get more info, but it sounded good.

The average selling time for properties in the neighborhood is 6 months. I ran some numbers on the conservative side - using an 8 month holding time, below market selling price, etc. and the results looked pretty good. For an all cash deal at $160,000, they could get about a 42% annualized return in that 8 months. Unfortunately, they had no funds available, so they had to pass. I passed as well, since most of my funds are tied up in hard money loans right now. Too bad.

One interesting thing is that I found the original note for the loan on the property and it was for more than $90,000. More than the current high offer of $150,000. That must mean they are trying a short sale, which means the lender would need to approve the final sales price. I would have thought the listing agent, who was a Realtor, would have mentioned this. I also suspect the $90,000 listing price was deliberately set low to attract potential buyers. I'm not sure about the ethics of this and I'm not sure what requirements Realtors have in setting the initial asking price, but it seems like a used-car salesman trick to me.

In other news, my progress towards rolling my IRA into a self-directed Roth IRA is slowly moving forward. For tax reasons, I had to wait until 2010 before I could do the actual conversion. I'm going about this in a couple steps. First, I am converting my Rollover IRA to a Contributory (Traditional) IRA. They are basically the same thing, but my CPA tells me the law that allows me to spread out taxes on the Roth conversion for two years only specifies conversions from a Contributory IRA to a Roth, not a Rollover. The law will probably be changed to fix this, but just to be on the safe side, I'm taking this extra step. The second step will be to convert the Contributory IRA to a Roth IRA. I will do this at the brokerage the IRA is currently at. The third and final step will be to transfer that Roth IRA to a company to who will set up the self-directed IRA. I am currently leaning towards the iTrust offered by NAFEP.

I am currently at the first step in this process and imagine it will take a couple of months to get everything all set up.